Ratings on Selective Affirmed - Analyst Blog

By: Zacks.com

Posted: 6/5/2013 3:28:00 PM

Referenced Stocks: ASI;GBLI;MRH;RBC;SIGI

Fitch Ratings has confirmed the Issuer Default Rating (IDR) of
"A-" and senior debt ratings at "BBB+" of
Selective Insurance Group Inc.
(
SIGI
). The rating agency also affirmed the Insurer Financial Strength
(IFS) Rating of "A+" of the Selective inter-company pool members.
The outlook on all the ratings has been downgraded to negative
from stable.

The rating affirmation came on the back of improved underwriting
results, sturdy independent agency relationships, solid loss
reserve position, and Selective's consistent efforts to diversify
its operations.

The combined ratio of Selective improved during the first quarter
of 2013 riding on the back of pricing growth and favorable loss
experience. Since the integration of Excess and Surplus line of
business into the company's operations, Selective's reporting
segments generated underwriting profit for the first time during
the first quarter of 2013. Fitch's rating affirmation also takes
into account this factor and the rating agency expects that in
the long run Selective will operate at break-even or a better
level.

The downward revision in the outlook came on the back of high
levels of statutory and financial leverage of the company as well
as waning levels of NAIC risk-based capital (RBC). It also took
into account Selective's operating earnings-based interest
coverage which was lower than the company's previous
performances.

Fitch has opined that cyclical underwriting pressure, weaker
investment performance and above-average catastrophe losses have
led to a decline in the company's profitability. Nevertheless,
the rating agency is of the opinion that the company engages a
moderate amount of financial leverage, with adequate financial
flexibility.

Fitch stated that an upward revision in the outlook to stable can
take place if the company shows sustained improvement in
underwriting performance by generating underwriting profit. Also
if net statutory leverage remains below 5.0x, financial leverage
remains below 25%, statutory RBC reaches 225% of the company
action level, and operating earnings based interest coverage move
towards 5x-7x or better, the outlook might be upgraded.

Fitch also stated that the ratings are liable of a downgrade if
the company experiences underwriting weakness for a prolonged
period thereby failing to generate underwriting profit under
normal catastrophe conditions. Moreover if operating leverage
increases above 1.7x, net leverage remains more than 5.0x,
financial leverage stays at more than 25%, and operating earnings
based interest coverage fails to make up to 5x-7x or better, the
ratings might be downgraded.

Rating affirmations from credit rating agencies play an important
part in retaining investor confidence in the stock as well as
maintaining the creditworthiness in the market. We believe that
the company's present score with the credit rating agencies will
help it write more business going forward.